Government's role in economy getting too big?
The US may have headed off a deeper recession by investing hundreds of billions into major companies. But it drives up deficits and creates uncertainty among investors.
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“If the government’s involvement continues over the longer term – as appears likely – executive compensation limits may siphon off talented executives to nonfinancial firms and leave a key sector with relatively less qualified and experienced managers,” Jagadeesh Gokhale writes in a recent analysis for the libertarian Cato Institute.Skip to next paragraph
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Too much spending?
Others have a different concern: that the cost of bailouts, coupled with other federal spending, will push federal deficits or taxes to the point that they hinder economic growth.
The current fiscal course of the government may mean that the economy grows at about 2 percent a year, rather than the 3 percent annual pace that’s been common for the past four decades, estimates Michael Cosgrove, a University of Dallas economist and forecaster.
Mr. Cosgrove, in his EconoClast newsletter, cites a 2008 study by European Central Bank economists, which found that “countries with a higher share of government expenditure … tend to grow more slowly.”
If government spending rises by 1 percentage point of GDP, the economic growth rate falls on average by 0.13 percent, the study found.
On Friday, Congress’s Government Accountability Office posted its own fiscal warning.
“Updated simulations continue to show escalating and persistent debt that illustrates the long-term fiscal outlook is unsustainable,” the agency said.
In one scenario, government debt would reach a level equal to one year’s GDP before 2025. That level is considered a danger zone, and some economists worry that the result will be higher borrowing costs for the nation as lenders mark down America’s credit rating.
Aware of the risks on this front, Obama has recently voiced determination to pursue long-term fiscal controls, but with little certainty yet on how he will achieve the objective.
The government has long been intertwined with the private sector in various ways, from regulation of banks to providing postal and passenger-rail services. This isn’t the first time that major chunks of the banking sector have been rescued in a financial crisis. And it isn’t just President Franklin Roosevelt who used the might of the government to engineer economic results during hard times. Republican President Nixon tried wage and price controls to battle Vietnam-era inflation.
A high water mark for government involvement was World War II, when much of American industry was mobilized for military production.
When will the bailouts end?
Yet the current government role in the private sector is unusually large.
How large could depend upon the performance of the economy. The longer the US is mired in a slump, the harder it may be for the government to unload its stake in carmakers or banks to private investors.
In the case of GM, the largest US carmaker, Obama’s task force is pursuing a deal in which the federal government would have majority ownership of a downsized company.
Regarding the financial industry, the Treasury Department’s “stress tests” – set to be released this week – could result in the US pouring more money in banks. If a bank is deemed to be short on capital reserves, government investment might be the only viable way to raise new capital.
So far, Obama has maintained strong public approval ratings. But Republican critics see government intervention in the economy as a potential chink in Obama’s armor.